It was the day after Christmas 1954, a really cold day after a big snow and I was nine years old. My twelve-year-old sister decided we should go sledding with her friends. Off we went to the steepest hill around that had two trails. One a relatively mundane no tree slope and the other a twisting ice packed snake filled with trees.
Given my age, level of intelligence, and natural desire to impress the older ladies you can imagine which trail I choose.
My sister had gotten a brand new Flexible Flyer Super Sled for Christmas. I’d generally used a piece of cardboard up to that time. There I was at the top of the wooded run and ready to go. I gave the ladies a confident smile and waved.
I pushed off and down and I went at hundred miles an hour. The first turn loomed ahead and I realized no one told my how to steer the damn thing. I hurdled closer and closer to the biggest tree on earth. I leaned right then left, but the sled didn’t respond.
Bang! I hit the tree and see nothing but stars as I rolled down the ice run.
The next thing I remember was walking home exclaiming “I’m in pain.” Now here’s the kicker, the only real thing that still sticks in my mind 60 years later is my sister mocking me saying “Pain, Peter Pain.” Obviously, I lived through that experience with no long-term effects, and by the end of the day things were back to normal and I was back on the trail the next day.
Impeachment and the Markets
Jack Welch, former and infamous CEO of GE, who has President Donald Trump’s ear, told CNBC on Wednesday that an impeachment would “blow the market away.”
(It wasn’t until a divorce settlement forced the disclosure of his retirement benefits package that anyone took any notice. At that time, the scandal surrounding Mr. Welch was that his perquisites were valued at $2.5 million a year, and included luxuries such as the use of an $80,000-per-month Manhattan apartment owned by the company, court-side seats to the New York Knicks and U.S. Open, seating at Wimbledon, box seats at Red Sox and Yankees baseball games, country club fees, security services, and restaurant bills. At the time of his departure Mr. Welch’s full retirement was valued at $420 million.)
Investment decisions and the Hill Investment Cube
Before we examine Welch’s forecast let’s go over the factors in investment decisions. I emphasize to my students that if you ask the right questions the investment choice will fall out. A good stock or bond today is not one tomorrow.
Think of an investor as having Keynes three types of money: transactions (money you need immediately for you daily needs); precautionary (money for a rainy day); and speculative (money that if you blow it you really aren’t hurt.)
Consider that there are three investment characteristics: risk (chances of losing your money); liquidity (how quick can I get it back); and yield (the return on my money.)
Think of the investment decisions as a cube. The types of money across the top in three segments and the characteristics of investment vertically in three rows.
Each type of investment can then be defined as: low risk (put your money in the checking account); take out a short-term CD in a low to moderate risk instrument (precautionary); or go to the market and buy risker stocks and high yield junk bonds (speculative money). Liquidity and yield can be assigned the same way.
The market really doesn’t like risk since the majority lean toward transactions mind frame and really don’t prefer risk.
Given the fact that an impeachment makes us nervous, one would think the market would tend to be lower with each of us thinking we need to preserve our capital in case of hard times. Let’s take a look at previous modern day impeachments and see what happened.
The Nixon Impeachment
November 11, 1972: Nixon is reelected in one of the largest landslides in American political history, taking more than 60 percent of the vote and crushing the Democratic nominee, Senator George McGovern of South Dakota. The S&P 500 index was 115.1
May 18, 1973: The Senate Watergate committee begins its nationally televised hearings. Attorney General-designate Elliot Richardson taps former solicitor general Archibald Cox as the Justice Department’s special prosecutor for Watergate. The S&P 500 is 107.2. This a 6.9% drop.
August 8, 1974: Richard Nixon becomes the first U.S. President to resign. Vice President Gerald R. Ford assumes the country’s highest office. He will later pardon Nixon of all charges related to the Watergate case. The S&P 500 is now 76.03 and has dropped 29.6% since Nixon’s 1972 election.
The obvious conclusion is that the Nixon impeachment and Watergate scandal drove the market down nearly 30%.
Well maybe it’s not that obvious.
Nixon expanded and extended price controls in January 1973. (President Nixon Imposes Wage and Price Controls August 15, 1971. In a move widely applauded by the public and a fair number of (but by no means all) economists. The ninety-day freeze was unprecedented in peacetime, but such drastic measures were thought necessary. Inflation had been raging, exceeding 6% briefly in 1970 and persisting above 4% in 1971. By the prevailing historical standards, such inflation rates were thought to be completely intolerable. The ninety-day freeze turned into nearly 1,000 days of measures known as Phases One, Two, Three, and Four. The initial attempt to dampen inflation by calming inflationary expectations was a monumental failure. The S&P 500 was 118.4 on January 1, 1973.
The wage and price controls were mostly dismantled by April 1974. By that time, the U.S. inflation rate had reached double digits. The S&P 500 was 92.46 in April 1974. That’s a 21.9% fall in prices due to inflation and failed price controls.
In addition, the 1973 oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo. The embargo occurred in response to United States’ support for Israel during the Yom Kippur War. The S&P 500 was 109.8 in October 1973. In March 1974 the embargo ended and the S&P500 was 97.44 a drop of 11.3%.
Things get even worst when you look at the Nifty-Fifty bubble pop that occurs during this time. (The Nifty Fifty refers to the fifty-popular large-cap stocks on the New York Stock Exchange in the 1960s and 1970s that were widely regarded as solid buy and hold growth stocks, or “Blue-chip” stocks. The fifty are credited with propelling the bull market of the early 1970s. Most are still solid performers, although a few are now defunct or otherwise worthless. The long bear market of the 1970s that lasted until 1982 caused valuations of the nifty fifty to fall to low levels along with the rest of the market, with most of these stocks under-performing the broader market averages.) The S&P 500 was 118.4 on January 1,1973 and 76.3 when Nixon resigns in August,1974. That’s are drop of 35.8%.
It could very well be that the dramatic economic events of 1973 and 1974 were the main causes of the stock prices falling during the Watergate crisis. It would be hard to prove what the impact of each factor had on the decline of the market but there is strong evidence to believe that the economic factors were a much larger impact on the S&P 500.
It is hard to tell where the Clinton saga begins but let’s use January 12, 1998 when Linda Tripp contacted the office of the Whitewater Independent Counsel Ken Starr to discuss the Monica Lewinsky tapes. The S&P 500 is 963.66. He is impeached on October 5, 1998 and the S&P 500 is 1032.47. That’s an increase of 7.2%.
No major economic crisis occurred during the Clinton saga to upset the markets, so we can get a better view of the impeachment impact on the market. It is clear the markets were not disturbed by the process.
It appears that Jack Welch fears that the market will be blown away may be self-serving. Given he is a major Trump supporter it is not a great jump to think the statement was intended to scare the population into an anti-impeachment mode. The evidence simply does not support the conclusion that the markets will be “blown away” if impeachment proceeding against Trump would occur.
When you have a President that has you sliding down a slippery slope out of control don’t be surprised if you hit a tree, but the good news is that you will walk away with little pain after a day or so.